Following trends is the simplest strategy using technical analysis a binary options trader can learn. A trend following system waits for a major movement in price in any direction and then places a put or call options in that direction.
A trader uses the historical data of a particular asset to decide the price direction of the asset in the future. The direction is only normally regarded as a trend if it continues in the same direction for a certain period of time. The length of time can vary, but in binary options trading this can typically involve a 1 day to a 7 day time period.
Probably the most successful method of using trend following is to research the moving averages of a particular asset and gauge the direction that the asset has taken in the past. A moving average is defined as an average where the last days are taken off from the average calculation. In a 5 day moving average, on the 6th day, day 1 is dropped off the average calculation. This ensures that only 5 days are ever calculated in the moving average. Therefore, this method provides a 5 day moving average.
If the moving average for the shorter period of time crosses majorly above or below that for the longer period of time, then it is possible to identify if an upward or downward trend has developed. Moving average strategies are strong technical trading strategies that are solid at defining trends. However, when used in isolation, they do not always generate the very best entry and exit points into a market.
A fair amount of trend following strategies will generate signals that can be wrong more often than they are correct, but the profits that are generated during the trend, far outweighs the losses that are borne when you are wrong. It is a strategy that can be successfully employed by both experienced and new traders, as historical data of asset movement is easily available to almost anyone trading binary options free of charge.
Support and Resistance
The application of trend following is made a simpler task by being able to identify support and resistance levels in a chart. These levels act as a floor and a ceiling to force the price back when it goes above or below the support and resistance levels.
Support is the level where traders are purchasing an asset. It is usually defined by low price points in a market in which traders purchased an asset believing the market will have ‘bottomed-out’ and not move any lower.
Resistance is the price level where supply is typically strong and the trader believed that prices cannot move further upwards. When the resistance level is breached, prices generally move in the direction of the break.
From the above picture, it is possible to identify the two points in which the price went up and stopped at a specific level thus creating a resistance level and the four points in which price came down and bounced creating the support level.
Support and resistance levels can be used on any time frame and can especially be useful in periods of low volume trading like at night when the markets are much slower and less unpredictable.
Trend line support and resistance levels make good sturdy pivot points reflecting the break out price action in a market and can be used as breakout points in which calls and puts can be used to trade the binary options market. Probably the most thorough type of period to use is daily price points. Due to the fast paced nature of binary options, a popular bar is the hourly price bar, but these are normally not regarded as being the most dependable and as thorough as when using daily price points.